Italian Bonds Drop After Auction as Portuguese Securities Slide

Italian and Spanish bonds dropped amid speculation the nations will struggle to attract sufficient demand from investors at debt auctions as both sell additional securities this month amid a deteriorating economic outlook.

Italy’s 10-year bonds dropped for a third day as the Treasury fell short of its maximum target at an auction and demand for its 30-year securities declined after Standard & Poor’s cut the country’s credit rating this week. Portugal’s 10-year bonds slid as President Anibal Cavaco Silva urged politicians to reach an agreement to let the country complete its aid program. German bunds rose after Federal Reserve Chairman Ben S. Bernanke said the U.S. still needed stimulus.

“We’ve had quite a lot of supply,” said Michael Leister, an interest-rate strategist at Commerzbank AG in London. There’s “quite a lot of peripheral paper for the market to digest,” he said, referring to the bonds of Europe’s most indebted nations.

Italian 10-year bond yields rose two basis points, or 0.02 percentage point, to 4.47 percent at 5 p.m. London time. The 4.5 percent security due in May 2023 declined 0.125, or 1.25 euros per 1,000-euro face amount, to 100.63.

The yield on similar-maturity Spanish bonds climbed one basis point to 4.82 percent, while Portugal’s 10-year rate increased 13 basis points to 6.90 percent.

Italy’s Treasury sold a combined 6.35 billion euros of debt, less than its target of 6.5 billion euros. Investors submitted bids for 1.3 times the 1.46 billion euros of 30-year bonds on offer, down from 1.97 times at the previous auction of similar-maturity debt on Feb. 13. Italy also auctioned 3.39 billion euros of three-year notes and 1.5 billion euros of floating-rate securities.

Spain has sold securities maturing in 2016, 2018 and 2028 this month.

Dealers ‘Cautious’

“We suspect market dealers remain cautious” on Italy, Annalisa Piazza, a fixed-income analyst at Newedge Group in London, wrote in a note to clients. “The economic outlook is very fragile and no solid recovery is expected anytime soon.”

Italian and Spanish government bonds declined yesterday after Standard & Poor’s cut Italy’s long-term credit rating to BBB, two levels above junk, citing a weakening of the country’s economic prospects. The outlook on the rating remains negative, the company said in a statement.

Portugal’s 10-year bonds dropped for a second day as Silva said early elections were undesirable. The 10-year yield jumped to a seven-month high of 8.11 percent on July 3, after a rift among coalition politicians emerged.

Risk ‘Increasing’

“Portuguese risk is increasing,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “There is general uncertainty now about where Portugal goes from here,” and whether they will need further aid, he said.

German’s 10-year yield fell four basis points to 1.62 percent after dropping to 1.60 percent on July 4, the lowest level since June 19.

“Highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy,” Bernanke said yesterday in response to a question after a speech in Cambridge, Massachusetts.

“What Bernanke said is driving core yields down,” said Alessandro Giansanti, a senior interest-rate strategist at ING Groep NV in Amsterdam. “The market was aggressively priced for a change in the stance of the Fed’s monetary policy and so Bernanke has quashed some of these expectations. That’s why we see a rally in core bonds.”

Volatility on Finnish bonds was the highest in euro-area markets today followed by those of the France and Germany, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.

French 10-year yields dropped two basis points to 2.23 percent and Dutch 10-year rates declined three basis points to 2.03 percent.

Italian bonds returned 2.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spanish securities gained 5.1 percent, while German bonds handed investors a loss of 1.3 percent, the indexes show.

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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